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In an effort to turn the page on a number of recent high-profile procurement scandals, federal officials now are mandating tougher ethical standards from firms that do business with the government.

After more than nine months of deliberation, the Civilian Agency Acquisition Council and Defense Acquisition Regulations Council have agreed on a final rule amending the Federal Acquisition Regulation.

The change, published Nov. 23 in the Federal Register, mandates that companies set up a written code of business ethics and conduct, initiate an ethics compliance training program, and institute an internal control system. Subcontractors must submit to their prime contractor documents attesting to their ethical policies.

The rule goes into effect Dec. 24.

The councils noted that many companies already have voluntarily adopted business ethics plans, but there is no governmentwide regulatory requirement. For defense contracts, the Defense Federal Acquisition Regulation Supplement recommends such a code, but does not make it mandatory.

"Meeting minimum ethical standards is a requirement of doing business with the government, whether dealing directly or indirectly with the government," the councils wrote.

Paul A. Denett, administrator for federal procurement policy at the Office of Management and Budget, said the new rule must be looked at together with the recently proposed Contractor Compliance Program and Integrity Reporting notice issued earlier this month.

That proposed rule, which was requested by the Justice Department, would require contractors to report potential criminal violations in connection with the award or performance of the contract to agency procurement officers and inspectors general, or face suspension or disbarment.

"When fully implemented, these rules fundamentally change what is expected of government contractors," Denett said in an e-mailed response to questions from Government Executive. "These rules move us from well-established principles of contractor self-governance and voluntary disclosure to contractual requirements [to establish ethics awareness programs and internal control systems] and mandatory disclosure [of violations of criminal law in connection with the award or performance of any government contract or subcontract]."

But some industry experts suggest the change will have little impact on the performance of federal contractors.

Larry Allen, president of the Coalition for Government Procurement, a trade group in Washington that represents contractors, said most firms already have well-established ethics programs that could be applied toward the new rule.

Allen said he suspects that the aim of the rule change was as much political as it was regulatory. The rule, he said, is an opportunity to pacify an unruly Congress exhausted from contracting scandals in Iraq and elsewhere, and a nod to the public that the government has heard their concerns and is reacting accordingly.

"I hope this measure makes the issue more visible," Allen said. "But will it cause a sea change in behavior? Probably not."

Contractors would have 30 days to provide a copy of their ethics policy to all employees engaged in the performance of the contract and 90 days to establish the training program and internal control system, the rule states. The contracting officer would have the authority to extend the deadline. The government will not review the plans unless a problem arises.

"Of course, if problems arise, it will be important to know if a contractor complied with requirements ... and whether the contractor timely disclosed violations of criminal law in connection with the award or performance of a government contract or subcontract," Denett said. "These are important factors in determining what sanctions, if any, are imposed upon a contractor who is found to be guilty of criminal conduct, or otherwise responsible for unethical or improper conduct. This should provide incentive for contractors to comply."

The councils also carved out an exemption for undersized firms that might have difficulty complying with the new rule. Small businesses are exempt from establishing formal ethics awareness programs and internal control systems, even if they hold contracts over $5 million. However, all small businesses are expected to have a code of business ethics.

Small business representatives had filed comments with the councils suggesting that the rule would be overly burdensome and could deter them from working with the government.

Prime and subcontracts for commercial items or for work performed outside the United States also would be exempt. The exemption does not include products sold on GSA schedules, Denett said.

While the councils did not spell out specifically what should be included in the written codes or training programs, they did lay out the parameters for what would be expected for internal controls.

Companies would be required to conduct "periodic reviews of their business practices, procedures, policies and internal controls," as well as internal or external audits. The internal control system also must include a self-reporting mechanism, such as a hotline, for employees to report ethically suspicious conduct.

Contractors that have yet to establish an apparatus for whistleblower disclosures would have to prominently display an agency fraud hot line poster in a central work area.

The councils received 27 public comments about the rule change, ranging from laudatory -- "an outstanding, well thought-out and needed policy change" -- to highly critical. One unnamed respondent said the rule was duplicative of existing requirements while another suggested the change adds "a further level of compliance and enforcement obligations."

COMMENTS

• Duplicative of existing rules and regulations. But if you must do it, why an exemption for work performed outside of the US? That is where the majority of high profile scandals are occuring. This rule misses the point, and adds new administrative requirements, but nothing that will alter a bad actor's behavior. Glenn Posted December 5, 2007 2:57 PM
• Bob & Robert have a twisted view of GV contracting. Profit is NOT #1 eval factor. We do NOT think ALL GV contractors are crooks and robbers, but many are! When their internally training documentation encourages unlawful behavior (ie, influencing source selection officials) and that their personel do whatever is necessary to prolong the revenue stream at the expense of the taxpayer (God forbid they should solve the problems they were hired to) - that is UNETHICAL in my opinion If contractors acted ethically, there would be no need to impose ethics requirements. Just read the news lately and you will understand the requirement! Ethics - either you have them or you don't. Bob Posted December 4, 2007 8:30 AM
• Admin of contracts a problem, you bet when you don't have the workforce to do the job. What's really damning is when the procuring activity want's the material so bad they chide the admin folks for doing the right thing. CO's & PCOs, EVER HEARD of signed approved deviation and required contract mod to accept nonconforming material? Yes the government has its demons too; all the more reason we need a trained competent oversight workforce to keep the contractors and the buying agencies in check. mike Posted December 3, 2007 11:48 AM